DIRECT FOREIGN INVESTMENT

DIRECT FOREIGN INVETMENT

THE MOTIVATION FOR DFI TECHNIQUES OF DFI

THE MOTIVATION FOR DFI

Trends in direct foreign investment (DFI)

Political factors:

exported jobs Assisted economic development of rival nations at the expense of the home country Reduced domestic investment

THE MOTIVATION FOR DFI

Reasons for DFI

Overall macroeconomic factors encouraging DFI:

The increase in world trade and the opening up of new markets that have occurred in recent decades The development of new technologies that can be transplanted between countries Liberalisation of the economies of nations throughout the globe, including removal of exchange controls and controls on the repatriation of profits Establishment of common markets and other regional trading blocs with common external tariffs

THE MOTIVATION FOR DFI

Motives for commencing foreign production:

High transport costs associated with exporting Problems with licensees and the need to protect intellectual property Availability of investment grants from foreign governments Lower operating costs Faster access to the local market Undercapacity at home

THE MOTIVATION FOR DFI

Motives for commencing foreign production:

A desire to protect supplies of new materials and components only available from foreign countries Local content requirements Especially favourable economic conditions in particular countries: buoyant markets, rising consumer incomes, easy access to finance, low interest rates, etc. Wanting to spread the risk of downturns in particular markets Acquisition of know-how and technical skills only available locally Desires to minimise worldwide tax burdens The need to engage in local assembly or part-manufacture

THE MOTIVATION FOR DFI

The decision whether to invest in foreign manufacturing capacity depends on:

Political stability of the country being considered The extent of government investment grants and subsidies Legal matters (ease of patent protection, wage and other costs, restrictions on the repatriation of profits, and taxation)

THE MOTIVATION FOR DFI

Strategies for direct foreign investment

Product - driven Market driven Technology - driven

THE MOTIVATION FOR DFI

Horizontal and vertical integration Advantages of the growth through horizontal integration:

It enables the firm with a mediocre performance record to improve its market position Economies of scale might become available The business develops a critical mass which could improve its competitive position Opportunities for diversification might arise from the process

THE MOTIVATION FOR DFI

Reasons for diversification:

Attempts to strengthen a hold on a market by controlling diverse activities Loss of traditional products or markets Large seasonal variations in demand for a firms existing product Overdependence on a handful of customers Successful research and technical development activities resulting in new products and applications Existing products reaching the ends of their life-cycles Increased competition within existing markets Potential for the joint marketing of a wide range of goods Spare capacity within the firm that can be utilised via the supply of fresh products

THE MOTIVATION FOR DFI

Diversification versus specialisation Advantages of diversification:

Lucrative opportunities can be exploited as they emerge so that the firms profit earning potential is extended Profits earned in certain areas of a diversified company can be used to reinforce activities elsewhere

THE MOTIVATION FOR DFI

Diversification versus specialisation Problems of diversification:

Genuine opportunities for diversification might not be available Faulty mechanisms for researching fresh market and/ or product opportunities can lead to disastrous investment decisions that could ruin the firm Diversification might result in the firm locking up large amounts of capital in particular technologies or administrative or distribution systems from which it cannot subsequently withdraw

THE MOTIVATION FOR DFI

Diversification versus specialisation Advantages of specification:

It develops great expertise in a particular area Product specialisation can mean improved use of labour and equipment, the development of a strong corporate image based on a single product line, and a big return of stocks The firm can maintain a position at the leading edge of the technology of its chosen field Large volumes of similar items will be supplied, leading to economies of scale, better customer care and a higher level of product quality It limits the range of problems connected with diverse multi-market multi-product operations

THE MOTIVATION FOR DFI

Diversification versus specialisation Difficulties with specialisation:

Outdated techniques and attitudes might passed on from one generation of employees to the next The strategy assumes that the firm can continue its current activities without hindrance and at peak efficiency There is a presupposition that the more a management and employees know about something the better at it they become The firm could become inward looking and resistant to change

TECHNIQUES OF DFI

Motives for acquisitions:

Removal of competitors Reduction of the likelihood of company failure through spreading risks over a wider range of activities The desire to acquire businesses already trading in certain markets and/or possessing certain specialist employees and equipment Obtaining patents, licences and other intellectual property Economies of scale possibly made available though more extensive operations Acquisitions of land, buildings, and other fixed assets that can be profitably sold off

TECHNIQUES OF DFI

Motives for acquisitions:

The ability to control supplies of raw materials Expert use of resources Desire to become involved with new technologies and management methods, particularly in risk industries The potential ability of a larger organisation to influence local and national government Tax considerations Additional financial and other resources, including greater capacity to undertake research

TECHNIQUES OF DFI

Problems with acquisitions:

Market conditions might suddenly change following a costly acquisition New competitors may emerge Resignations of key employees in the acquired business might occur Control difficulties created by having to manage a large and diverse organisation could arise The activities, working methods and organisation structures of the amalgamating firms may turn out to be fundamentally incompatible

TECHNIQUES OF DFI

Problems with acquisitions:

Even if the smaller of the merging businesses is more efficient than the larger, it may have little or no influence on decisions taken by the amalgamated company after the merger A firm which takes over another and pays for it in cash may subsequently become extremely short of liquid assets Senior managers in one of the firms taken over might not be worth employing in the larger company Increased size can lead to diseconomies of scale rather than improved efficiency

TECHNIQUES OF DFI

Conditions for success of acquisitions:

Clear specification of acquisition objectives Establishment of meaningful criteria for the choice of the firm(s) to be acquired Development of sound search procedures for finding suitable target businesses Careful planning of the entire process, using expert outside assistance where appropriate

TECHNIQUES OF DFI

Selecting acquisition targets:

The targets long-term prospects The calibre of the targets management team The number of shareholders in the target company Share price of the target The value of the target companys property and other assets

TECHNIQUES OF DFI

Divestment:

The sale or closure of operating units in order to:

Rationalise activities Concentrate resources in particular areas Downsize the organization

TECHNIQUES OF DFI
New start-ups Factors for the choice of a new start-up:

Finance Labour Ancillary services Operational factors